4. Section 1 Introduction | 1
1 Introduction
Rabobank sees agri commodity prices down, the levels seen in 2008/09. Elevated price
but not out, in 2012. Improved fundamental levels must persist in order to encourage
balances and uncertain economic conditions farmers to continue expanding production
are expected to keep prices below the 2011 to keep pace with demand growth and
highs. However, risks to our price forecasts allowing global inventories to rebuild.
are skewed upwards as reliance upon
Agri commodity demand should remain
nontraditional producers pose an increasing
robust in 2012 as consumptive growth in
threat, and inventories remain near
emerging-market economies continues to
historical lows.
drive the agri complex. Our analysis suggests
We believe the long-term bull run in agri that supply side risks, from both weather
commodities remains, but expect prices and politics, have increased again for 2012
across the complex to ease from their record and there remains considerable risk of an
highs, continuing their downward trajectory inflection in both price and volatility levels
in place since mid-2011. Absent further macro amid adverse production conditions across
deterioration, prices are unlikely to plunge to the agri complex.
Figure 1.1: Rabobank’s 2012 agri commodity price forecasts
Q1’11 Q2’11 Q3’11 Q4’11f Spot* Q1’12f Q2’12f Q3’12f Q4’12f
Wheat (CBOT) USc/bu 788 748 688 610 579 595 630 615 595
Wheat (Matif) EUR/tonne 253 234 199 170 179 162 175 172 166
Corn USc/bu 674 732 696 620 585 610 645 630 610
Soybeans USc/bu 1,381 1,363 1,358 1,165 1,122 1,178 1,226 1,260 1,251
Soy oil USc/lb 57.0 57.3 55.8 49.4 49.3 48.7 50.2 49.1 47.5
Soymeal USD/ton 260 240 230 300 282 310 290 330 335
Palm oil MYR/tonne 3,681 3,365 3,100 3,000 3,171 2,800 2,900 3,000 3,100
Sugar USc/lb 30.6 24.4 28.7 24.5 23.1 23.5 23.0 22.0 22.0
Coffee USc/lb 258 271 257 230 232 220 200 180 170
Cocoa USD/tonne 3,322 3,042 2,969 2,400 2,246 2,350 2,450 2,350 2,300
Cotton USc/lb 182 168 108 95 91 85 85 80 80
Source: Rabobank, Bloomberg, 2011
5. 2 | Rabobank Outlook 2012—Down, But Not Out
We see lower average prices for all agri 1. Economic slowdown
commodities covered in our 2012 forecast.
2. Speculators and the US dollar
However, we see upside, from depressed spot
prices, for corn, wheat, soybeans, sugar and 3. Policy risks
cocoa as fundamentals reassert themselves
4. Capacity constraints
and market participants continue to come to
grips with the European debt crisis. We see Given the heightened uncertainty in the
downside to cotton and palm oil prices in the macro environment, we have decided to
short term. In the livestock sector we expect frame our price and fundamental forecasts
higher live cattle prices and slightly lower lean in base, low and high-case scenarios to
hogs prices in 2012. give guidance over the level of confidence
around our economic forecasts and macro
Our outlook is centred on four key themes
level assumptions.
for the agri commodity markets in 2012
which we expect to determine commodity
prices. Aside from the inherent weather
uncertainties in agriculture, we identify
these variables as critical for the agri complex
over the next 12 months.
Rabobank’s 12-month outlook for prices from current levels
Soymeal prices are likely to rebound in 2012 after
SOYMEAL underperformance relative to soy oil and soybeans in 2011.
Soybean prices are likely to be lower YOY in 2012, but
SOYBEANS remain historically elevated, rationing demand, as global
production declines.
US live cattle prices are expected to fall in Q1 2012 from their
LIVE CATTLE November 2011 highs as a record number of cattle on feed outstrips
demand in the near term.
Although lower than 2011 averages, we expect corn prices to rally
CORN from current spot prices into Q2 2012 before easing in Q4 2012 on
record production.
Abundant supply of cocoa beans and better expectations for the
COCOA 2011/12 crop are expected to lead prices lower in 2012.
The demand profile for soy oil is relatively recession-resistant,
SOY OIL which will likely see prices remain elevated in order to slow
demand growth.
Neutral price direction is expected over the next 12 months as the
WHEAT second largest world wheat crop on record softens the fundamental
outlook, but coarse grains provide support.
Despite our forecast for record large palm oil production in 2012, we
PALM OIL expect the low stock levels of total vegetable oils to limit palm oil’s
price downside.
Momentum in the US lean hog market is expected to wane in 2012
LEAN HOGS as producers increase farrowing to meet demand and Chinese
import growth slows.
We forecast lower international sugar prices in 2012 as the market
SUGAR shifts into a surplus for the first time in three seasons.
We expect the global cotton industry to be under pressure and
COTTON prices to fall due to the largest global cotton crop on record.
Prices are forecast to fall in 2012 due to the large harvests expected
COFFEE in Brazil and Vietnam, but diminished stocks will keep risks high.
6. Section 1 Introduction | 3
A quick look in the rear-view mirror: A review of our forecasts for 2011
One of the most common questions we get when talking to clients is “how accurate were your forecasts last year?” This is a
very valid question, so before we launch into our 2012 agri markets outlook, we would like to share a quick self-evaluation
of our performance in 2011—the good, the bad and the ugly.
Our 2011 agri markets outlook report, Agri Bull Market Clouded by Macro Uncertainty, released in December 2010,
highlighted seven key themes for the year ahead.
1. Tightening inventory levels
2. Supply limitations
3. Demand growth from emerging markets
4. China commodity short
5. Heightened political risk amid tightening food supplies
6. Fundamentals only part of the story
7. Sustained heightened volatility
These were the issues we saw as the most important variables likely to influence agri commodity markets in 2011, in
addition to constant supply and demand drivers, such as weather vagaries. Overall, these issues all showed varying degrees
of relevance in 2011, and many of them will remain relevant in 2012, assuming the absence of major weather events.
As last year’s title suggested, from a fundamental viewpoint we held a bullish outlook for the agri complex; our price
forecasts showed an expectation of higher prices for all but one market in 2011. Our top picks for 2011 were corn, soybeans
and coffee, and as it turned out, two out of three ranked at the top of the list in terms of year-on-year price increases, with
coffee the top performer, followed by cotton and corn (see Figure 1.2). Our price forecasts for most commodities were
generally accurate in terms of direction, with only cocoa moving against our forecast due to the outlier event of the
election crisis in Ivory Coast, which we did highlight as a risk, and which created an unexpected rally for prices. Interestingly,
as the situation has normalised and supply chains have restocked, prices have tracked in line with our forecast curve, albeit
at an elevated level (see Figure 1.3).
The other major event of 2011 was the hottest July the US Midwest has seen in over 50 years, which reshaped the supply
side of the balance sheet for the grains complex. This extreme weather event resulted in both a production forecast
downgrade of over 10% and significantly higher prices. Since April, our price forecasts have reflected a much tighter
balance sheet and have quite accurately indicated Q2 as a turning point with quarter-on-quarter declines forecast for Q3
and Q4 (see Figure 1.4).
Figure 1.2: Rabobank 2011 forecasts (December 2010) vs. actual, 2011
Rabobank 2011 forecasts (December 2010) Actual
Q1’11 Q2’11 Q3’11 Q4’11 Q1’11 Q2’11 Q3’11 Q4’11
Wheat USc/bu 700 680 675 675 788 748 688 610
Corn USc/bu 600 580 550 540 674 732 696 620
Soybeans USc/bu 1,300 1,275 1,200 1,185 1,381 1,363 1,358 1,165
Soy oil USc/lb 53 54 52 52 57 57 56 49
Soymeal USD/ton 355 350 345 340 367 354 353 300
Palm oil MYR/tonne 3,650 3,200 2,900 2,750 3,681 3,365 3,100 3,000
Sugar USc/lb 28 26 24 22 31 24 29 25
Coffee USc/lb 195 195 190 185 258 271 257 230
Cocoa USD/tonne 2,550 2,450 2,350 2,300 3,322 3,042 2,969 2,400
Cotton USc/lb 135 115 90 85 182 168 108 95
Source: Rabobank, Bloomberg, 2011
7. 4 | Rabobank Outlook 2012—Down, But Not Out
Figure 1.3: ICE NY Cocoa; Rabobank forecast vs. actual prices, Figure 1.4: CBOT Corn; Rabobank forecast vs. actual prices,
2010-11 2010-11
3,400 800
750
3,200
700
3,000 650
600
USD/tonne
USc/bu
2,800 550
500
2,600
450
2,400 400
350
2,200 300
Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11
Q1’10 Q2’10 Q3’10 Q4’10 Q1’11 Q2’11 Q3’11 Q4’11
Actual Dec 2010 forecast Actual Dec 2010 forecast Apr 2011 forecast
Source: Rabobank, Bloomberg, 2011 Source: Rabobank, Bloomberg, 2011
Our most accurate price forecasts across the year were for oilseeds (soybeans, soymeal, soy oil and palm oil) and wheat,
where negative supply-side issues were less of a factor (see Figure 1.5). Our least accurate forecasts were two of the ‘COs’,
cotton and coffee, where despite the direction of the forecast being correct, the magnitude of the price increases was well
above our expectations.
Figure 1.5: Rabobank quarterly average price forecasts vs.
actual price moves in 2011
70
60
50
40
percent
30
20
10
0
-10
-20
Wheat
Corn
Soybeans
Soy oil
Soymeal
Palm oil
Sugar
Coffee
Cocoa
Cotton
Rabobank December 2010 forecast Actual
Source: Rabobank, Bloomberg, 2011
Our commodity price forecasts are provided as a guide to demonstrate our expectations for price direction throughout
the year—regularly updated in our Agri Commodity Markets Research Monthly reports. In view of the level of volatility in
the macroeconomy and the general uncertainty in 2011, our forecasts from a year ago have turned out to be reasonably
accurate. Our bias for higher prices in the complex proved correct and our top picks—corn, soybeans and coffee—
performed better than expected. The seven key themes we identified all played a role in price movements during 2011,
most notably supply limitations and heightened political risk due to their impact on corn and cocoa prices. As these risks
intensified in Q1 2011, our price forecasts were more accurately revised higher while maintaining a downward bias towards
the end of 2011. Although our forecasts for 2H 2011 appeared bearish against market estimates and the futures forward
curve, our expectations for more balanced fundamentals and an easing in prices have largely played out, and we expect
this to continue into 2012.
8. Section 2 Key themes for agri markets in 2012 | 5
2 Key themes for agri markets in 2012
Economic slowdown Biggest losers
Slowing global economic growth in 2012 We anticipate an increased supply of many
will only have a modest impact on agri agri commodities to result in lower prices in
commodity prices as resilient emerging- 2012, but we do not expect a price collapse
market demand offsets anaemic growth due to supportive demand and only a modest
expectations in the developed world. build-up of inventories. However, as supply is
We expect commodities that have a large forecast to be historically tight for many agri
speculator long position and those with commodities, we anticipate supply-side
a high correlation to global growth, concerns to remain a major supportive factor
including livestock and cotton, to be the for most markets, especially coffee and corn.
most vulnerable to slowing global growth. On the demand side of the ledger, we expect
Commodities with a stable demand base lower international prices to encourage buying
and supportive fundamentals, such as corn and stock-building. In our view, demand loss in
and coffee, are expected to be the least the developed world will be inconsequential
exposed to a contraction in economic growth. even with an economic downturn, as lower
prices encourage commercial buying.
Rabobank sees continued macro uncertainty
Demand growth in emerging markets is
with stagnant growth prospects in the EU
expected to remain robust and a driver
and the US, and resilient but weaker
of prices in the agri complex.
expansion in the emerging-market
economies in 2012 (see Figure 2.1). We view We see the cotton and livestock markets
the prospect of a return to recession as a as most vulnerable to economic contraction
considerable risk for both the US and the EU, and stagnant growth. Total meat and fish
but we expect any contraction to be shallow. consumption in the US peaked in 2004 and
As industry and governments are aware of has been declining ever since due to altered
the recession risk and are positioned diets and reduced incomes. This trend is being
defensively, we expect a downturn to be countered by increased meat and fish
small. Our emerging-market growth forecast consumption in emerging markets, which is
projects a level of growth similar to what was more than enough to offset the reduction in
seen in the first half of the decade, and while US consumption. In our view, the higher
the emerging markets are not likely to be able valued livestock markets will be exposed to
to decouple from the developed world, we demand loss if there are further reductions to
see domestic consumption prospects and household incomes in the US. The high share
proactive governments as reasons these of speculators in the livestock futures markets
economies will avoid being dragged into a is also viewed as a threat since a risk-off sell-
recession by the developed world economies. off could pressure the markets. The speculator
net long in the US livestock markets of
9. 6 | Rabobank Outlook 2012—Down, But Not Out
15 November represented 22% of total open US and EU to stumble along
interest, up from 9% in early June, and up Rabobank’s macro economists are forecasting
from the 2011 average of 18%. Given the economic growth in the US to be slightly
fundamentals, there is a compelling reason lower in 2012 as political deadlock and
for livestock values to be elevated currently, waning consumer confidence result in
but we see the market as particularly economic stagnation. Gross domestic product
vulnerable to macro risks. Since cotton is a (GDP) in the US is forecast to grow at 1.5% in
consumer product, the cotton market is also 2012, down from 1.7% in 2011 and down
highly susceptible to recession, and given the from 3.0% in 2010. In the EU the outlook is
forecast fundamentals in the new season, we bleaker; we expect debt concerns and stalling
see heightened downside risk. Cotton prices member economies to bring about only slim
on the NY market have fallen during the last positive growth. EU GDP is expected to slow
seven US recessions going back to 1970 to 0.4% in 2012 from the 1.6% expected in
(see Figure 2.2). Cotton prices are forecast 2011 and the 1.8% expected in 2010. Our
lower in 2012 due to better supply and modest growth forecast assumes the EU will
lacklustre demand, but weakening economies have found a lasting resolution to the debt
could extenuate the downside correction. crisis. Elevated risks remain skewed to the
downside for both regions as unemployment
Differing underlying fundamentals as well
remains high, market sentiment is weak and
as diverse income elasticities of demand
social unrest is rising.
will result in varied price reactions among
commodities during recessionary events. We We forecast limited demand loss for agri
expect the main economies of the world to commodities in both the EU and the US
remain out of recession in 2012, but as risks of even in the face of a double-dip recession.
a double-dip recession in both the US and the Although real incomes are declining in the
EU are high, we have reviewed the potential US and unemployment is high in both
response in the agri complex. In general, regions, food remains a small part of
recessions do not impact agri commodities discretionary incomes and the consumption
uniformly. In fact, supply dynamics are much of most agri commodities is anticipated
more important for price movements, and to be stable. High-value products such as
this is expected to be the case in the event of livestock or consumer-oriented cotton are
a recession in 2012. Recessions have little the most exposed to economic risk and
effect on the demand side in the developed could be threatened depending on the
world and economic contractions do not scale of a downturn.
generally impact supply, which is much more
Emerging markets to drive demand
dependent on long-term prices and weather.
growth
The downside risk for commodities is much
Rabobank anticipates emerging-market
larger if a sizeable slowdown in emerging
growth to ease in 2012 but demand growth
markets occurs, as this is the source for much
in agri commodities to remain strong. We
of the expected expansion in consumption.
foresee economic growth rates in the
Figure 2.1: Rabobank GDP quarterly growth estimates and Figure 2.2: Performance of the S&P GSCI Agriculture Index over
forecasts, Q1 2000-Q3 2012 the past seven US recessions, Dec 1969-2009
15 600
10 500
400
percent
5
300
0
200
-5 100
0
-10
Oct-11
Apr-01
Apr-73
Oct-76
Apr-80
Oct-83
Apr-87
Oct-90
Apr-94
Oct-97
Oct-04
Apr-08
Dec-69
00Q1
01Q1
02Q1
03Q1
04Q1
05Q1
06Q1
07Q1
08Q1
09Q1
10Q1
11Q1
00Q3
01Q3
02Q3
03Q3
04Q3
05Q3
06Q3
07Q3
08Q3
09Q3
10Q3
11Q3e
12Q3f
12Q1f
e=estimate; f=forecast
US Euro area China Brazil S&P GSCI Agriculture Index Recession
Source: IMF, Rabobank, 2011 Source: Bloomberg, Rabobank, NBER, 2011
10. Section 2 Key themes for agri markets in 2012 | 7
emerging markets to hover near the bottom is significant as household incomes increase
of levels seen just before the financial crisis and demand changes from staple grains to
of 2008/09, with emerging-market growth more protein from meat. The higher share
forecast at 6.5% for 2012, down modestly of income devoted to food in China is also a
from 6.9% in 2011 and 7.8% in 2010, but threat as higher prices can result in significant
modestly higher compared with the 2000- demand destruction. The ongoing
2005 average of 6.0%. In our view, the demographic and agricultural conversion
emerging-market economies will not be from a rural population and fragmented
able to decouple from a slowdown in the production to an urban population and
developed world, but increasing domestic intensive food production will continue in
demand will play a larger role in growth and 2012. Domestic inflation of food prices is
will be supportive for the agri complex. For forecast to ease in 2012 as international agri
Brazil, we expect GDP growth in 2012 of 3.6%, commodity prices fall. This is likely to support
flat from 3.6% in 2011, and we continue to further increases in demand in China. In our
see global demand for agri commodities view, elevated agri commodity prices resulted
as a driving force in the Brazilian economy. in Chinese government destocking in 2011.
The changing diets and increasing urban The need to restock inventories will be a
population in the emerging markets are supportive impact for prices and is expected
expected to remain the drivers for the agri to occur despite the modest forecast
complex. Demand for oilseeds in emerging downturn in economic growth.
markets has grown 110% since 1999 while in
Doomsday outcome
the developed world the increase has been
Rabobank views the likelihood of a recession
12% (see Figure 2.3). Increasing consumption
or major contraction of the Chinese economy
of agri commodities in emerging markets has
in 2012 as very slim. However, a contraction
played a major role in tightening balance
would have major consequences for both the
sheets despite large global harvests in the
global economy and the agri commodity
past two seasons, and we expect this trend
complex. Given the Chinese government’s
to continue in 2012.
readiness to spend vast reserves to
A slowdown in the key Chinese economy in support the economy and to acquire agri
2012 is not expected to impact the growth commodities to alleviate high domestic prices
in agri commodity demand as inventories and avert social unrest, we would expect
are low for many commodities, inflation the agri complex to remain supported even
is elevated and the government has the in the case of slower-than-anticipated
means and will to secure supplies on the economic growth. A hard landing for China
international market to temper and even would have profound negative impacts on
control domestic food prices (see Figure 2.4). the agri complex, but any contraction event
Food costs represent a higher share of would likely only have short-term impacts
household income in China relative to the on the market.
US or the EU. This is an opportunity since the
potential to increase agri commodity demand
Figure 2.3: Oilseed consumption EU and US vs. BRICs, Figure 2.4: Global GDP and agri commodity demand indexed,
1999/00-2011/12f Dec 1986-Dec 2010
160 300 500
150 450
140 250 400
130 350
million tonnes
Dec 1986 = 100
Dec 1986 = 100
120 200 300
110 250
100 150 200
90 150
80 100 100
70 50
60 50 0
Dec-86
Dec-88
Dec-90
Dec-92
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12f
Corn demand Soybeans demand
US and EU BRICs Sugar demand Global GDP (RHS)
Source: Rabobank, USDA, 2011 Source: USDA, Rabobank, IMF, 2011
11. 8 | Rabobank Outlook 2012—Down, But Not Out
Economic outlook
Recession or slowing economic growth will
be a threat to the agri commodity markets in
2012, but in our view the expected resilient
demand growth from many agri commodity
markets in emerging economies will help
mitigate the impacts from any economic
downturns. We anticipate lower-than-average
stock levels of many agri commodities to
support prices; while harvests are expected
to be large, encouraged by the high prices,
the supply response is still catching up to
demand. In our view, a recession, if it does
occur, would be expected to be shallow
and not to impact agri commodity demand.
However, cotton is viewed as more
susceptible to a downturn, and livestock
consumption can also be impacted by
recession, but we see emerging-market
demand expansion as more than sufficient
to make up for demand losses in the
developed world. We anticipate lower prices
in 2012 as a function of better supply; this
will support demand despite the heightened
global macro uncertainty.
12. Section 2 Key themes for agri markets in 2012 | 9
Speculators and the US dollar likely against most other commodities in
Weak fundamentals for the US dollar should 2012. Loose monetary policy conditions in
produce a period of further devaluation the US following two rounds of quantitative
versus most other currencies throughout easing in 2008 and 2010, ongoing record
2012, providing upside support for most low interest rates, high unemployment and
agri markets. But as we have seen in 2011, anaemic growth expectations for the US
fundamentals do not always matter. economy are expected to see most other
Rabobank’s base-case macro and foreign currencies outperform the US dollar over
exchange forecasts suggest that a weaker the next 12 months. However, we do expect
US dollar environment will reappear again to see some recovery of the US dollar against
in 2012. While global financial market and major commodity currencies in 2012, which
macroeconomic uncertainty remain a we believe are overvalued.
significant risk to our forecasts, particularly
These weaker fundamentals for the US dollar
if the trend of widespread risk aversion
look set to reassert themselves in 2012, and
continues from 2011 into 2012, a generally
while the US Federal Open Market Committee
weaker US dollar should be a supportive
(FOMC) has not indicated they will implement
factor for the agri complex in the year ahead.
another round of quantitative easing stimulus
Unsurprisingly, we do not expect the (QE3) at this stage; they have not ruled it
weakness of the US dollar to be uniform out either, and we expect this to remain in
in magnitude or even direction, with the play throughout 2012. Even without QE3,
potential for short-term upside against US Federal Reserve policy measures look
the euro afflicted by political paralysis and set to remain loose, with US Federal Reserve
disunity in the member bloc. However, against Chairman Bernanke explicitly stating that
other currencies we see further downside for the federal funds rate was set to remain at
the US dollar from current levels, improving an “exceptionally low level at least through
both the purchasing power of emerging- mid-2013” given conditional economic
,
market importers and the competitiveness conditions. Our forecasts do not see a case
of US agricultural exporters against many for strong enough growth in 2012 to move
of their key competitors (see Figure 2.5). We FOMC policy from current levels. A risk to
would expect most prices within the agri this view is the possibility that the European
complex to appreciate in a weaker US dollar Central Bank could become the lender of
environment. We highlight corn, wheat, last resort which would have a longer term
soybeans and lean hogs as the biggest drag on the euro, balancing the poor US
winners in the complex as the US export dollar fundamentals.
market improves on a weaker dollar.
Recovery from the current challenges appears
Once the dust settles on the EU debt crisis, likely to be protracted and hence we see
we expect focus to return to weaker loose monetary policy and a weak US dollar
fundamentals for the US dollar, with downside as capable of buttressing the US economy.
Figure 2.5: Rabobank FX forecasts, 2012
Q1’12 Q2’12 Q3’12 Q4’12
EUR/USD 1.33 1.39 1.45 1.48
USD/JPY 78.00 79.00 82.00 83.00
GBP/USD 1.56 1.62 1.69 1.74
USD/CHF 0.93 0.90 0.90 0.91
AUD/USD 1.00 0.98 0.97 0.95
NZD/USD 0.76 0.75 0.74 0.73
USD/CAD 1.00 0.99 0.98 0.98
Source: Rabobank, 2011
13. 10 | Rabobank Outlook 2012—Down, But Not Out
‘Flight to safety’ has become a common complex and key macro indicators jumping
catch cry in 2011 and, given the ongoing sharply to reflect the focus of the EU debt
macroeconomic uncertainty, risk aversion crisis (see Figure 2.7). As this continues to
may well continue to be a key theme in 2012. play out, we expect uncertainty to remain
This macro uncertainty—primarily the result elevated, resulting in a continuation of high
of the EU debt crisis, but also influenced by correlation between most asset classes
bipartisan politics in the US and mounting continuing into 1H 2012.
worries of a Chinese economic slowdown—
Speculators abandon ags
has created a risk-on/risk-off trading
Speculative money flows will largely be
environment in all markets over the past
determined by the macro environment in
12 months. Risk-off has meant a withdrawal
2012, with a clear resolution in the euro area
of funds from emerging market assets and
needed to restore confidence levels amongst
currencies, as they are perceived to be higher
investors. Over the past 12 months, we have
in risk than the US dollar, despite growth
seen diverging dynamics: the first half of the
prospects in these markets remaining much
year saw surging agri markets attracting
stronger than in most developed economies.
additional investor inflows as an inflationary
For agricultural prices, this has compounded
hedge amid rising world food prices, while a
price volatility as speculators have not only
flight to safety resulted in significant net
shifted into and out of the underlying agri
outflows of investor capital from agri markets
markets, but also between the commodity
in the second half of the year. Looking ahead,
currencies and the US dollar (see Figure 2.6).
a sudden and complete return of investor
Looking ahead to 2012, the challenge
money into the agri complex appears
becomes one of macro uncertainty and
diminished as the macro uncertainty is likely
whether we continue to see periods of
to remain for some time to come. We also
extreme risk aversion continuing in 2012.
expect there will be less of a constructive
Correlation spike fundamental story in agri markets in 2012 as
The extreme macro uncertainty has resulted fundamentals appear more in balance than in
in all asset classes becoming even more recent seasons.
intertwined over the past 12 months. Broader
Winners and losers
themes such as liquidity, political risk, financial
Based on Rabobank’s forecast of a weaker US
stability, austerity measures and social unrest
dollar against most developed and emerging-
have all resulted in agri markets, currencies,
market currencies over the next 12 months,
equities and other asset classes becoming
commodities produced and exported from
highly correlated for most of 2H 2011. Recent
the US are the most likely to benefit. Further
developments have escalated fears of
devaluation of the US dollar in 2012 will add
contagion. Globally, there are considerable
support to what we expect to be resilient
concerns as to whether individual commodity
emerging-market demand for agricultural
or asset class fundamentals have become
commodities (see Figure 2.8). Recent years
mostly irrelevant as focus has shifted from risk
have seen considerable decoupling of
appetite to risk aversion. In September 2011,
emerging-market currencies from the US
we saw the correlations between the agri
Figure 2.6: Managed money net long positions in agri Figure 2.7: Correlation between the agri complex and key macro
commodities vs. S&P GSCI Agriculture Index, Jan 2007-Nov 2011 indicators, Jan 2007-Sep 2011
600 1,400 0.7
daily price correlation to MSCI World Index
550 1,200 0.6
S&P GSCI Agriculture Index
500 1,000 0.5
thousand contracts
450 800 0.4
400 600 0.3
350 400 0.2
300 200 0.1
250 0 0
Jan-11
May-11
Sep-11
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
2007 2008 2009 2010 2011 Sep-2011
S&P GSCI Agriculture Index CBOT Corn NY ICE Sugar
S&P GSCI Agriculture Index Managed money net long (RHS) CBOT Wheat Average (Rabobank coverage)
Source: CFTC, Bloomberg, 2011 Source: Rabobank, Bloomberg, 2011
14. Section 2 Key themes for agri markets in 2012 | 11
dollar, which enables additional purchasing
power in a weaker US dollar environment.
In the instance of China, one of the key
destinations for US agricultural exports, looser
regulatory control has seen the Chinese
renminbi gain 7%-8% versus the US dollar
since mid-2010 and over 23% since 2005. We
are forecasting a near-record 4 million tonnes
of corn to be exported to China in the
2011/12 season and, given domestic supply
concerns and inflationary pressure from
historically high grain prices, a weaker US
dollar versus the renminbi may encourage
further imports to help meet burgeoning
domestic demand. Similarly, we also see
additional demand support from a weaker
US dollar for soybeans, pork and beef.
A weaker US dollar can also alter trade flows
by providing improved competitiveness for
US agricultural exports on the world market.
Commodities we see as most likely to benefit
from this are the key US grains and oilseeds
such as corn, soybeans and, to a lesser degree,
wheat. US beef and pork exports will also
likely benefit from a devaluation of the US
dollar, although market access tends to be a
more potent determining factor for these
markets. While the US dollar is forecast to
weaken against most currencies, we are
forecasting it to strengthen against the
Australian and New Zealand dollars and to
hold fairly stable relative to the Canadian
dollar. Although these commodity currencies
are generally defined by their economies’
reliance on metal and energy exports,
agricultural exports from these countries can
compete with US exports for global market
share. For example, wheat exports from
Australia will likely benefit from a weakening
Australian dollar relative to the US dollar.
Figure 2.8: USD index and S&P GSCI Agriculture Index, 1993-2011
120
550
110
450
100
350
90
250
80
70 150
2001
2011
1993
1995
1997
1999
2003
2005
2007
2009
USD index S&P GSCI Agriculture Index
Source: Rabobank, Bloomberg, 2011
